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EOQ and ROP Analysis for Inventory Systems

The document presents several case studies focused on inventory management for different companies, including Sumco Pump Company, Patterson Electronics, Lila Battle's hardware store, and West Valve Company. Each case outlines the annual demand, ordering costs, carrying costs, and requests calculations for optimal order quantities, reorder points, and associated costs. The goal is to minimize total inventory costs while ensuring sufficient supply to meet demand.

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15 views4 pages

EOQ and ROP Analysis for Inventory Systems

The document presents several case studies focused on inventory management for different companies, including Sumco Pump Company, Patterson Electronics, Lila Battle's hardware store, and West Valve Company. Each case outlines the annual demand, ordering costs, carrying costs, and requests calculations for optimal order quantities, reorder points, and associated costs. The goal is to minimize total inventory costs while ensuring sufficient supply to meet demand.

Uploaded by

mshabanewes
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Q1: Sumco Pump Company Example

Sumco, a company that sells pump housings to other manufacturers, would


like to reduce its inventory cost by determining the optimal number of pump
housings to obtain per order. The annual demand is 1,000 units, the ordering
cost is $10 per order, and the average carrying cost per unit per year is $0.50.
Using these figures, if the EOQ assumptions are met, we can calculate the
optimal number of units per order

Solution
Q2:
Patterson Electronics supplies microcomputer circuitry to a
company that incorporates microprocessors into refrigerators and
other home appliances. One of the components has an annual
demand of 250 units, and this is constant throughout the year. The
carrying cost is estimated to be $1 per unit per year, and the
ordering cost is $20 per order.

a. To minimize cost, how many units should be ordered each time


an order is placed?
b. How many orders per year are needed with the optimal policy?

c. What is the average inventory if costs are minimized?

d. Suppose the ordering cost is not $20, and Patterson has been
ordering 150 units each time an order is placed. For this order
policy to be optimal, what would the ordering cost have to be?
Q3: 6-18
Lila Battle has determined that the annual demand for number 6
screws is 100,000 screws. Lila, who works in her brother’s hardware
store, is in charge of purchasing. She estimates that it costs $10
every time an order is placed. This cost includes her wages, the cost
of the forms used in placing the order, and so on. Furthermore, she
estimates that the cost of carrying one screw in inventory for a year is
one-half of 1 cent. Assume that the demand is constant throughout
the year.

(a) How many number 6 screws should Lila order at


a time if she wishes to minimize total inventory
cost?
(b) How many orders per year would be placed?
What would the annual ordering cost be?
(c) What would the average inventory be? What would the annual
holding cost be?
Note: to convert from cent to
dollar divide on 100
--→0.5 cent / 100 = 0.005 dollar
6-21
Barbara Bright is the purchasing agent for West Valve Company.
West Valve sells industrial valves and fluid control devices. One of the
most popular valves is the Western, which has an annual demand of
4,000 units. The cost of each valve is $90, and the inventory carrying
cost is estimated to be 10% of the cost of each valve. Barbara has
made a study of the costs involved in placing an order for any of the
valves that West Valve stocks, and she has concluded that the
average ordering cost is $25 per order.
Furthermore, it takes about two weeks for an order to arrive from the
supplier, and during this
time the demand per week for West valves is approximately 80.

(a) What is the EOQ?

(b) What is the ROP?


(c) What is the average inventory? What
is the annual holding cost?
(d) How many orders per year would be
placed? What does the annual
ordering cost?

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